AT&T; to Invest in DirecTv to Help Broaden Satellite Service

Hoping to avoid risking hundreds of millions of dollars in Wednesday’s government auction of satellite TV licenses, AT&T; Corp. said Monday that it will instead invest $137.5 million in Hughes Electronics Corp.’s DirecTv and help sell the company’s satellite television equipment and services.

The investment will enable El Segundo-based DirecTv to expand substantially the marketing of its 1 1/2-year-old service, which now competes mostly with cable television to provide movies, comedy shows and other video fare for $20 to $70 a month--plus $500 to $900 for an 18-inch satellite dish and other equipment.

Experts said the move will probably intensify the race by telephone, cable and satellite firms to deliver more advanced video and communications services to homes and businesses.

“What you are seeing basically is a three-way race between the satellite people, the cable industry and the phone companies to see who can be the first to provide the most effective and affordable products,” said John Pike, director of space policy for the Federation of American Scientists.

Indeed, the investment by AT&T;, which recently announced it would split into three companies to better take on an array of new competitors in the burgeoning telecommunications business, comes as DirecTv itself faces a new crop of direct-broadcast satellite rivals.

United States Satellite Broadcasting Co. and Primestar Partners are DirecTv’s only rivals for the moment. But a third is on its way: Echostar launched a satellite three weeks ago and plans to offer service later this year. In addition, Primestar said last week it would add about 50 channels of programming to its current 90-channel lineup at the end of this year.

Meanwhile, MCI Telecommunications Corp., a unit of long-distance carrier MCI; TCI Technology Ventures Inc., a subsidiary of cable giant TCI; and Echostar will compete in Wednesday’s Federal Communications Commission auction of a nationwide and regional license for direct-broadcast service. The minimum opening bid is $125 million.

Although cable operators are spending millions to offer dozens more cable channels and even interactive services, experts say nearly 25% of the nation’s population is so remote it will never be reached by cable wires. These locales are prime territory for direct broadcast. Satellite broadcasters can also offer more channels--up to 175 in the case of DirecTv--and they say their digital transmissions offer better picture quality.

Eddy Hartenstein, president of DirecTv, said the “unparalleled marketing expertise” of AT&T; will enable DirecTv to expand its customer base even more rapidly. The service has gained 1.2 million subscribers since its launch in 1994, but growth has slowed dramatically after a fast start.

For AT&T;, the DirecTv alliance represents the latest in a series of deals aimed at giving the company a foothold in emerging communications and multimedia businesses. Joseph P. Nacchio, executive vice president of AT&T;’s consumer and small-business division, said his company can help lure new DirecTv customers by using everything from AT&T;’s Universal credit card division to its “True Rewards” long-distance incentive program.

“Our customers count on AT&T; to put leading-edge communications, information and entertainment services comfortably within their reach,” Nacchio said. In keeping with his company’s one-stop shopping approach, Nacchio said, AT&T; plans to integrate the marketing and billing for DirecTv with its long-distance service and thus become a “single source of supply for all of [our customers’] communications and entertainment needs.”

Although AT&T; has the option to increase its investment in DirecTv up to 30% over five years, experts say it is far from certain that AT&T; will make any long-term commitment to the direct-broadcast satellite business.

In recent years, they say, AT&T; has embraced and then suddenly abandoned a host of initiatives outside its core long-distance telephone business, including computer manufacturing and an ill-fated commercial online service called Interexchange, which the company moved to reposition this month as a regular Internet offering.

“I think AT&T;’s investment record is so spotty that this is not going to be considered a particularly important event,” said Howard Anderson, managing director of Yankee Group, a Boston-based telecommunications consulting firm.

Although FCC officials were disappointed by the paucity of bidders for Wednesday’s direct-broadcast auction, others applauded AT&T;’s decision to shun the event.

“The auction is a bad idea and a very bad approach because it has an enormous amount of uncertainty attached to it,” said James L. Gray, chairman of Primestar.